Interest rates to be left on hold as policymakers weigh Budget plans

Bank of England policymakers chewed over George Osborne’s action-packed Budget today and assessed the state of the UK’s economic recovery in the face of global uncertainties.

The bank rate was left on hold after the summer Budget and a week of market turmoil around the world that saw shares collapse in China and Greece move closer to a possible exit from the eurozone as it tries to strike a last-minute deal with creditors.

UK interest rates have been held at their historic low of 0.5 per cent since March 2009 and economists seem to agree that a rise will not come until at least next year.

No change: UK interest rates have been held at their historic low of 0.5 per cent since February 2009

Marc Ostwald, analyst at ADM Investor Services, said the chance of a surprise rise today was ‘zero’ and that the focus would be on minutes of today’s meeting to be published in two weeks-time ahead of the August inflation report.

‘While there has been rather more volatility since the election in market expectations for UK rates, the still rather mixed profile to incoming UK data and surveys, the renewed crisis in Greece, the turmoil in Chinese markets and the uncertainty about the global economic outlook, and the pushing back on US rate lift-off expectations, leaves Q1 2016 as the consensus view, with some risk seen of a move in November,’ he said.

Martin Beck, senior economic advisor to the EY ITEM Club, said that despite today’s decision, hawkish noises recently emanating from the MPC implied that the current unanimity could break down soon.

‘Looking ahead the odds of the majority of the Committee voting for a rate rise anytime soon look slim,’ he said.

‘Inflation is set to remain close to zero for much of the year and recent falls in commodity prices threaten a return to deflation. At the same time sterling’s ongoing strength is making life increasingly difficulty for exporters.’

The Bank’s monetary policy committee is faced with mixed economic data when considering when to raise interest rates.

Recent official figures show that the UK economic growth was revised higher to 3 per cent in 2014 from 2.8 per cent and to 0.4 per cent in the first quarter of this year from 0.3 per cent.

Construction firms continue to benefit from the resurgent housing market, with activity accelerating at its fastest pace in four months in June, and the services sector continues to power ahead, expanding more than expected last month.

Wages have also started to grow recently, soaring 2.7 per cent in the three months to April – their highest rate for nearly four years.

Warning: Mark Carney has warned that the outlook for UK financial stability has worsened because of the crisis over debt-laden Greece

While these upbeat data offer the MPC’s ‘hawks’ a reason to argue for a rate rise, low inflation, which stands at 0.1 per cent, as well as stalling growth in manufacturing and fears over Greece remove pressure for any imminent need for a rise.

Moreover, the Office for Budget Responsibility’s growth forecasts for the next two years, announced yesterday, were slightly revised down – 2.4 per cent from 2.5 per cent for 2015 and 2.3 per cent for 2016.

The Bank of England’s chief economist Andy Haldane, one the MPC’s ‘doves’ – policymakers against a rise – recently warned that an early interest rate hike could plunge Britain back into recession.

Andy Haldane said he was not worried about pay growth pushing up inflation as he said that wages were not ‘about to embark on a rocket-propelled ascent’.

Rather, he worried that raising interest rates too early ‘would risk generating the very recession today it was seeking to insure against tomorrow’ and said rates were as likely to be cut as to be raised in the future.

Hawks and doves: Martin Weale (left) could be voting for an rate rise soon, while Andy Haldane warned that an early interest rate hike could plunge Britain back into recession

But ‘hawks’ Martin Weale and Ian McCafferty could be voting for an interest rate hike as soon as the August MPC meeting, according to IHS Global Insight economist Howard Archer.

‘However, while the minutes of the June MPC meeting perhaps came across as modestly more hawkish, there was little sign that any of the other 7 MPC members were poised to imminently start voting for an interest rate hike.

‘For the time being, we maintain the view that the Bank of England is most likely to start raising interest rates in the first quarter of 2016,’ he said.

Meanwhile, Bank governor Mark Carney has warned that the outlook for UK financial stability has worsened because of the crisis over debt-laden Greece – facing a euro exit if it cannot agree tough measures to help unlock a bailout package.

Investec economist Chris Hare said: ‘All told, developments on the month are unlikely to see a shift in MPC voting, but further evidence of wage pressures might see the hawks calling for rate rises later this year.’

David Kern, chief economist at the British Chambers of Commerce said the decision to keep interest rates on hold was right, as the UK was still facing many headwinds.

‘The fast moving situation in Greece is creating uncertainty for businesses, particularly those exporting across the EU,’ he said.

And added: ‘Although inflation will slowly edge up over the next 18 months, it will remain well below the Bank of England’s 2 per cent target until well into 2016. In addition, following the Chancellor’s summer budget, businesses will need a period of stability through which to plan and invest.’